What are the best ways to fund a marketplace in 2022? Here is a complete guide to marketplace funding to get you started.
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When launching an online marketplace, the first thing one may ask is: “How am I going to pay for this?” Two words: marketplace funding.
There are multiple ways to go about funding an online marketplace. In this article, we’ll discuss those various financial methods, explain how to find funding and investors, and define terms to educate you on the matter.
You're in the right place if you’re looking for help on marketplace funding. Now, let’s get started!
What is marketplace funding?
Marketplaces are platforms that connect buyers with sellers and help facilitate transactions online. Digital in nature, online marketplaces are exploding in popularity as they provide endless opportunities, limitless inventories, and ultimate convenience.
Some of the world’s biggest companies are online marketplaces, like Amazon and Airbnb. However, success stories like this don’t always come from bootstrapping a business. Those who want to scale faster need external means. Enter, marketplace funding.
There are many ways to raise capital for a business. Let’s break down the different types of marketplace funding so you can learn financially how to grow your online marketplace.
Bootstrapping is a term that any entrepreneur is familiar with. It’s the base level of funding since it only involves the entrepreneur(s) who started the business. Simply put, bootstrapping is when one starts a business only relying on their own capital, like personal savings.
If one were to start a marketplace, they may bootstrap their business until it grows to a size where it requires more money to operate or expand. Bootstrapping is ideal in the beginning since it allows the owner to maintain full control, yet it obviously has its limitations since it’s entirely dependent on the personal finances of one person.
Venture Capital, or VC, is another common way to fund a business. In short, VC is a form of private equity. It’s the type of financing that investors, investment banks, or other financial institutions will provide to startup companies that promise growth potential.
After a marketplace gains its initial VC, it may host “Seed Rounds” to raise more capital. These are often labeled Series A, B, or C and each funding round is larger than the last.
But, VC is far from free money. In exchange for VC, the marketplace owner gives them ownership stakes in the company. The VC investors usually help manage the company and mentor the company’s executives to drive further growth.
Another method of marketplace funding is through Angel Investors. Angel Investors are similar to Venture Capital, but rather than multiple people or an institution, Angel Investors are individuals. Typically, Angel Investors are business professionals with high incomes or net worths who have (or had) successful companies themselves.
A benefit of finding Angel Investors is that they often provide first-hand experience from their own endeavors. They know how to launch, grow and scale a company. They also receive ownership stakes in the company in exchange for their money, so now they have skin in the game. This means they share a mutual interest to help you—and your marketplace—succeed.
As the name suggests, Crowdfunding is when funding is raised by a large, collective group of people. Normally, the people within the “crowd” are third-party individuals unrelated to the business.
The money raised through crowdsourcing can be viewed as more of a donation since the “crowd” simply supports the idea. They are not gaining ownership within the company, but that also means they are not invested in its success and may not provide further support than a small monetary gift.
Thanks to online marketplaces like GoFundMe or Kickstarter, Crowdfunding is more accessible and easier to accomplish than ever (more on that later).
Grants from governments and foundations
If your online marketplace’s business plan aligns with widespread initiatives, it may be eligible for grants from the government or other foundations. Grants are funding that is simply given to a business to promote entrepreneurship. They are awarded by the government at the federal, local, and state levels.
These financial awards are often given to non-profit businesses or educational organizations for the common good. However, the government may provide grants to a wide range of businesses when times are tough, for example during Covid-19.
The best part about grants is the money doesn’t need to be paid back! There are plenty of free grants available for small businesses now. Begin your search on Grants.gov (if within the United States) to explore possible funding aid.
Loans from banks and other institutions
Lastly, loans are a way to secure marketplace funding. Loans are available from banks or other institutions like the Small Business Administration (SBA). One must apply for a loan and if approved, the funds are granted—with interest.
The upside to taking a business loan is that it may be easier than sourcing investors. However, the downside is that interest rates can make loans quite expensive. The average interest rate for 2022 for a small business loan is between 3.19% to 6.78% at banks.
Business loans also require good credit and a level of annual income. In 2022, the SBA requires $20,000 although some may accept as low as $10,000.
How much funding does your marketplace need?
So, how much money do you need to start a marketplace? It depends on which stage it’s at.
A marketplace startup will go through multiple stages and demands different funding at each. Three stages of considering funding a marketplace are:
1. Problem/Solution Fit: Initial Marketplace Funding
When first building a marketplace startup (or any business), one must determine what problem or solution it’s solving. In short, why would consumers pay for it? By defining this problem/solution fit, businesses can develop their first “minimum viable product,” or MVP.
What type of funding should I get? During this stage, there is not much point in searching for investors as not many would invest before a clear MVP is presented and maybe even proven. Initial marketplace funding is often bootstrapping or a small business grant.
2. Product/Market Fit: First Marketplace Funding Efforts
Once your online marketplace launches its MVP, it’s time to gain traction and find product/market fit. That means ensuring your marketplace product is meeting the demands of the market. If it works, now is the time to consider funding to grow past the initial stage.
What type of funding should I get? To get your marketplace to the next level, you can use initial funding from Venture Capital or Angel Investors, or consider a business loan if you wish to maintain full ownership. Typically, the first round of funding is a few hundred thousand dollars.
3. Scaling: Later Marketplace Funding Efforts
If you’re wondering how to scale a marketplace, the answer is now large-scale funding. Scaling a marketplace is only possible with adequate finances to do things like grow your team, increase marketing budgets, rent office space, expand internationally, and so much more.
What type of funding should I get? This is when you would consider hosting a Series A, B, C (or onward) when applicable. If your marketplace proves to become a high-growth startup, these series rounds could raise millions in investments.
How to find investors for your marketplace
Now that you know about the different types of funding and at what stage you should seek which type, let’s discuss how to find these investors in the real world.
Deciding that you would like to raise Venture Capital is a big decision that requires a lot of preparation and perhaps, multiple attempts with different institutions.
To get VC funding for your marketplace or any business, typical steps include:
- Preparing a business plan and determining your business valuation and the funds needed
- Preparing a pitch (presentation of your business plan) for your marketplace
- Sourcing interested Venture Capitalists and presenting your pitch
- Negotiating terms and undergoing due diligence
- Closing the deal
Pitching to secure VC is extremely challenging. According to one study, the odds of receiving an equity check from a certain large VC firm is just 0.7%. This is because Venture Capitalists take on your business’ risk, and the chances of a startup becoming successful are only 8%.
If you’d like to find Angel Investors for your marketplace instead, the best place to begin is within your personal network. Post on platforms like LinkedIn and expand your professional network by attending networking events and more. Then, begin making great efforts to discuss your marketplace’s goals with this audience to find interested parties.
You can also find Angel Investors on platforms like AngelList, Angel Forum, or the Angel Capital Association. To convince an angel to invest in your marketplace would follow the same steps as attempting to gain VC (above).
This strategy is now easier than ever thanks to crowdfunding platforms, but it takes careful planning to get the most from your crowdsourcing campaign.
Before choosing a platform to host your fundraisings, like Kickstart or Indiegogo, you must work on communication. Prepare the story behind your fundraising initiative and make your fundraising monetary goal clear. You’re asking an audience of strangers for money, so be sure to explain how their donations would be used.
Next, many provide a gift or incentive to these crowdfunders. For example, consider awarding them beta/early access to your marketplace, free memberships, physical goods/gifts, or swag. According to TheCrowdDataCenter, only 23% of crowdfunding efforts meet their goals.
Over to you!
There you have it! Now, you are acquainted with six different ways to raise marketplace funding, know when to consider each, and even how to seek investors out.
To wrap it up, funding is a smart (and likely necessary!) way for your online marketplace to succeed when you grow beyond your own means. With careful preparation and proving your MVP up front, investors of all kinds will be excited to share in your successes.
Which marketplace funding strategy are you most curious about? Let us know in the comments!